The big winner in a GM-Chrysler merger

David Welch

October 21, 2008, 12:00 AM EDT

Who’s the real winner if a General Motors-Chrysler merger goes down? Well, it won’t be the United Auto Workers, who stand to lose jobs when GM combines product lines and shutters plants. Ditto for the Michigan economy and white-collar folk at Chrysler.

Not many think GM will be a winner, either. General Motors thinks it will get cash and revenue by acquiring Chrysler. Then, GM management thinks, they can restructure the company and make that revenue stream profitable. Of course, GM has to successfully restructure Chrysler and not burn the better part of Chrysler’s $11 billion doing so. That’s a lot of headaches for the top of the house at GM.

But let’s look at who really benefits from this deal. It’s Chrysler’s owner, Cerberus Capital Management, and its bankers, of course. Under one proposal, first revealed in BusinessWeek online in this story on Oct. 17, GM takes over Chrysler’s auto business and Cerberus keeps a minority stake in the combined company. Then Cerberus, which owns Chrysler Financial Services and 51% of GMAC Financial Services (GM owns the rest) merges the two lenders. GM keeps a minority stake.

So think about this. Cerberus would get to own a minority stake in a larger carmaker with a much more stable future than Chrysler. Yes, GM has a world of problems. But its size, global presence and technology make it a player for the long term if it can weather the current storm. Chrysler can’t make it on its own. That’s why the company may soon change hands for the third time in a decade. Cerberus would get to relinquish the tough task of fixing an American car company, which obviously is no easy task. Since GM is public, Cerberus also has a liquid stock that can be sold on the open market, assuming GM gets its house in order and the stock price rises.

Cerberus also gets the majority stake in a large financial company. The merged GMAC and Chrysler Financial could slash back office staff and boost profitability. Once GMAC’s ResCap mortgage unit clears up its bad loans, the combined lender could be a real money maker. And Cerberus would have the reigns.
The other entity that makes out in this is J.P. Morgan Chase, which holds about $10 billion in Chrysler debt. I’m sure it would rather see GM as the new borrower of record than Chrysler. So you see, this deal isn’t as crazy as many analysts have said, if you’re one of the Wall Street firms at the table.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.